Where's the money?: The post-pandemic landscape marked a tough year for startups at large, but the “startup winter” is slowly dissipating, according to experts.

Startups in 2022 and 2023 saw a slew of layoffs, valuation cuts and the government tightening the noose around regulations, bringing certain big names in the radar of corporate governance.

Hard Times

Certain startups like payment platform Zestmoney and Akudo, as well as gaming app Striker, B2B app Anar, short form videos app Fantok had shut shop. This trend has alerted venture capitalists, who are now focused on startups, emerging sectors and not holistic players in hyped sectors at large.

Siba Panda, Founder and Managing Partner of ValuAble said startup funding has declined to a five-year low figure in the previous year.
“In India, startup funding has declined to a five-year low in 2023 at $7 billion as opposed to nearly $25 billion in 2022, recording an over 70 per cent decline from 2022,” he said.

Shedding light on the reason, Panda said “massive” global economic environment impacted by geopolitical and social tensions created a tough year for Indian startups.

But late-stage beauty commerce company Mamaearth had a public offering, and two late-stage startups - Zepto and Incred - entered the unicorn club.

For some, revisiting and revising strategy helped hit profitability, Panda said.

A period of transition

Sohil Chand, founding partner and CIO of LC Nueva AIF agreed with Panda on the funding crunch, deeming 2023 to be a year of transition after a dismal 2022.

“2023 was a period of transition, when companies were (still) coming back from the euphoria of the post-COVID period. The focus for Lighthouse Canton and other VC funds was to focus on business metrics and building them the right way.”

Despite witnessing a significant 65.8 per cent decline in funding value from January to November 2023, amounting to $6.9 billion across 1,013 VC deals, Indian startups exhibited resilience, according to Dr. Somdutta Singh, Founder and CEO Assiduus Global Inc.

Late Stage Graduation from VCs to Listing

The VCs added that 2024 will see more activity around late-stage startups preparing for IPO.

“New investments in 2023 will be towards early stage more and later stages less and IPO markets have opened up (for the latter),” Chand said.

Panda said there will be a significant rise in both investment inflow and outflow, with inflow driven by direct participation in larger rounds by foreign investors, smaller rounds will be largely led by domestic funds which in turn will see influx of global capital.

“Last year was funding winter, but this year will see more startups with IPOs coming in,” Panda added.

Dr Singh said two key forces shaped the startup landscape: a staunch dedication to pragmatic innovation and a notable surge in tech startups heading towards IPOs.

“In 2024, the IPO landscape is expected to feature a distinctive preference for mid-sized offerings, a very strategic choice reflecting startups' aspirations to achieve a balance between financial expansion and sustainable growth,” she added.

Money not free

Even as early-stage startups see better chances of investments, there is a ‘granular’ focus on businesses rather than sectors, Chand emphasised.

“The fiscal year 2023 saw a deficit of capital for growth and late-stage funding, with only 17 rounds exceeding the $100 million-mark. However, a trend among early-stage founders finds that there is a growing consensus on the value of capital,” Panda pointed.

The total funding raised for early-stage startups, Panda said, was $11.3 billion with 984 deals of which 181 deals raised $8.8 billion into growth stage compared to 656 deals totaling $2.5 billion into early stage.

There have been signifact M&A deals totalling to 145, he added.

Emerging interest

The promise for the current year lies in the IPO market, as well as sectors like fintech, B2B and emerging technologies like artificial intelligence, electric vehicles and space-tech platforms.

Chand said fintechs, B2B platforms or enterprise-focused companies as well as consumer companies, apart from startups in emerging technologies like AI/ML, deep-tech and space tech will take the front stage in 2024.

“I see a renewed interest in startups. The environment has improved around the end of 2023. Unit margins have become important, and investors will continue to be more selective. New emerging sectors like AI and ML will translate into a slew of startups in 2024, with digital transformation becoming the bread and butter of 2024,” he added.

The space industry will see emerging interest after Chandrayaan launch in 2023, with a focus on global capabilities and drone technologies, he added.

“I think the pivotal forces will be their persistent drive for technological advancements and innovation. Startups at the forefront of transformative technologies like AI, biotech, and clean energy will definitely attract substantial funding due to their potential to reshape industries,” Singh noted.